If we have an official Hindenburg Omen then a critical set of market conditions necessary for a stock market crash exists – and such occurred on Dec.2nd. We now have a much higher-than-random probability of a stock market crash, or at the very least a significant decline, starting sometime over the next four months.

The above introductory comments are edited excerpts from an article* by Robert McHugh Ph.D.(technicalindicatorindex.com) as posted on gold-eagle.com under the title We Got an Official Confirmed Hindenburg Omen December 2nd , 2014.

This is the first Hindenburg Omen since September 19th 2014 which led to a 1,162 drop in the Dow Industrials over the next 27 days…and only the 9th since 2008…which led to the massive stock market crash in the autumn of 2008, and the 10th since the Bear Market started in October 2007. We got crashes after both the October 2007 and June 2008 Hindenburg Omens.

What is a Hindenburg Omen?

A Hindenburg Omen is the alignment of several technical factors that measure the underlying condition of the stock market — specifically the NYSE — such that the probability that a stock market crash (a decline greater than 15 percent) occurs is higher than normal, and the probability of a severe decline is quite high. Such an omen has appeared before all of the stock market crashes, or panic events, of the past 30 years except the mini-crash of July/August 2011... Without an official confirmed Hindenburg Omen, we are pretty safe. On the other hand, if we have an official Hindenburg Omen, then a critical set of market conditions necessary for a stock market crash exists.

What is the history of the origin and evolution of the Hindenburg Omen signal?

It was originally adopted by the late Jim Miekka… derived from a New High – New Low indicator developed by Gerald Appel many years ago. Because it signals the possibility of a stock market crash…the late Kennedy Gammage…dubbed it the Hindenburg Omen after the famous ill-fated aircraft associated with the word “crash.”

What are the conditions for a confirmed Hindenburg Omen?

The traditional definition of a Hindenburg Omen was based on 3 conditions, namely:

Condition #1: The daily number of NYSE New 52 Week Highs and the Daily number of New 52 Week Lows must both be so high as to have the lesser of the two be greater than 2.2 percent of total NYSE issues traded that day,

Condition #2: The NYSE 10 Week Moving Average is also Rising, which we consider met if it is higher than the level at any time during the previous 10 weeks and

Condition #3: The McClellan Oscillator is negative on that same day.

With just the above three filters defining a Hindenburg Omen, there were too many false positives to render the indicator useful. I conducted research, convinced that this indicator had strong potential to predict periods of extreme stock market declines, and came up with two more filters that vastly improved the predictive value of this indicator.

Condition #4: The New 52 Week NYSE Highs cannot be more than twice New 52 Week Lows; however it is okay for New 52 Week Lows to be more than double New 52 Week Highs. My research found that there were two incidences where the first three conditions existed, but New Highs were more than double New Lows, and no market decline resulted. There were no instances noted where if 52 Week Highs were more than double New Lows, while the first three conditions were met, that a severe decline followed, so condition # 4 becomes a critical defining component.

Condition #5: For a confirmed Hindenburg Omen, in other words, for it to be “official,” there must be more than one signal within a 36 day period, i.e., there must be a cluster of Hindenburg Omens (defined as two or more) to substantially increase the probability of a coming stock market plunge. My research noted 11 Hindenburg Omen instances over the past 30 years — using the first four conditions — where there was just one [1] isolated Hindenburg Omen signal over a thirty-six day period. In 10 of the 11 instances, no sharp declines followed. In only one instance did a sharp subsequent sell-off occur based upon a non-cluster single Omen, but in that case it was incredibly close to having a cluster of two Omens as the previous day’s McClellan Oscillator just missed being negative by a few points.

We have an unconfirmed Hindenburg Omen if the first four conditions are met, but the fifth is not — in other words we only have one signal within a 36-day period. Once a second or more Omen observation occurs, we then have a confirmed and official Hindenburg Omen signal with substantially higher odds that a subsequent stock market plunge is coming.

My research has also noted that plunges can occur as soon as the next day, or as far into the future as four months (about half occurred within 41 days). In either case, the warning is useful. It just means, if you want to play the short side after a confirmed signal, or move out of harms way, you must be prepared to see it happen as soon as the next day, or four months from now.

How many confirmed Hindenburg Omen signals have there been over the past 30 years?

Based upon the five parameters noted above...there have been only 35 confirmed Hindenburg Omen signals over the past 30 years. September 2014’s is the 35th. This is amazing when you consider that during that time span, there were roughly 7,500 trading days. Of those 7,500 trading days where it was possible to generate a confirmed official Hindenburg Omen, only 228 (3.04%) generated one, clustering into 35 confirmed potential stock market crash signals. This is a very rare alignment, a rare but potentially dangerous condition in the stock market.

How has the Hindenburg Omen signal performed over the past 30 years, since 1985?

If we define a crash as a 15% decline, of the previous 35 confirmed Hindenburg Omen signals:

8 (22.9%) were followed by financial system threatening, life-as-we-know-it threatening stock market crashes

3 (8.6%) more were followed by stock market selling panics (10% to 14.9% declines),

4 more (11.4%) resulted in sharp declines (8% to 9.9% drops),

7 (20.0%) were followed by meaningful declines (5% to 7.9%),

9 (25.7%) saw mild declines (2.0% to 4.9%), and

4 (11.4%) were failures, with subsequent declines of 2.0% or less.

Put another way, there is:

a 22.9% probability that a stock market crash — the big one — will occur after we get a confirmed (more than one in a cluster) Hindenburg Omen’

a 31.5% probability that at least a panic sell-off will occur (a decline greater than 10%),

a 42.9% probability that a sharp decline greater than 8.0% will occur, and

a 62.9% probability that a stock market decline of at least 5% will occur.

Only one out of roughly 8.8 times will this signal fail.

All the major stock market crashes over the past 30 years, with the exception of the July/August 2011 decline, were preceded and identified by the Hindenburg Omen signal as defined by our five conditions.

It was present and accounted for a few weeks before the stock market crash of 1987,

it was there 3 trading days before the mini crash panic of October 1989,

it showed up at the start of the 1990 recession,

it warned about trouble a few weeks prior to the L.T.C.M and Asian crises of 1998,

it announced that all was not right with the world after Y2K, telling us early 2000 was going to see a precipitous decline;

it gave us a three month heads-up on 9/11 (2001), and told us we would see panic selling into an October 2002 low,

it warned in October 2007 that a multi-month plunge (16%) was about to start, from the DJIA’s all-time high and

it was on the clock three months before the stock market crash of the autumn 2008 into spring 2009 that wiped out 47.3% of the stock market’s value.

In September 2005, the Fed pumped $148 billion in liquidity from the first week in September, just before the Hindenburg Omens were generated — to the third week of October, an 11 percent annual rate of growth in M-3 (2.5 times the rate of GDP growth and 5 times the reported inflation rate), to stave off a crash. The liquidity held the market to a 2.2 percent decline from the initiation of the signal.

In April 2004, the Fed pumped $155 billion in liquidity from the last week in April — right after the Hindenburg Omens were generated — to the third week of May, a 22 percent annual rate of growth in M-3, to stave off a crash. Even with the liquidity, the market still fell 5.0 percent.

The 12/23/1998 signal barely qualified, as the McClellan Oscillator was barely negative at –9, and New Highs were nearly double New Lows. Had this weak signal not occurred, condition # 5 would not have been met. This skin-of-the-teeth confirmation may be why it failed. It says something for having multiple, strong confirming signals.

Additional observations on the above data

The actual stock market declines are often greater than the measures in the prior data chart because, oftentimes, the decline from a top has already started before the Hindenburg Omens have been generated. These percent declines are only measuring the declines from the first Omen in a cluster. If we measured declines from the tops, it would be worse in many cases. For example, the September 2005 signals came after the September 12th high of 10,701. The autumn decline of 2005 into October 13th, 2005 bottom ended up being 545 points (5%) even with all the liquidity pumping by the Fed.

Oftentimes equities will rally after a Hindenburg Omen occurs, faking folks out, then the plunge comes on the other side of the hilltop. 1987 is a perfect example of that.

Once you get two solid Hindenburg Omens in a cluster, the probability of a severe decline does not seem to increase as more Omens occur within the cluster. Sometimes a two signal cluster produced a worse decline than a 5, 11, or 17 signal cluster. What can be said about multiple signal clusters, however, is that the warnings are being given further out in time, keeping us on the alert. More signals also assure us a greater likelihood of better quality signals, which seems to matter. Multiple signals are telling us things are not getting better, that something continues to remain wrong with the market.

A confirmed Hindenburg Omen is not a guarantee of a stock market crash. The odds of a crash based upon the history since 1985 is 23.5%. That means the odds we will not have a crash are quite high, at 76.5%.

However, since a stock market crash is akin to economic death in many circles, you can look at the situation like this:

If you were hearing from your doctor that the surgery you are contemplating stands a 23.5% chance of you dying, that becomes a very high percentage probability – one you likely do not want to take if the surgery is not absolutely necessary. A 23.5% probability of a stock market crash is extremely high when you consider that there have been only 8 over the past 30 years, and the normal odds of a crash happening randomly are only about one-tenth of one percent [ 0.01%].

You now also have to factor that the Fed is pumping liquidity to prevent crashes once these signals occur. That clearly occurred after the December 2010 Omen signal, QE 2 so you do not want to go short the farm. It is interesting to note, however, that even with the heavy liquidity the Fed has been pumping around the time of the past two signals, the odds of a 5% decline or more remain pretty high at 61.7%!

You may want to think about taking prudent precautionary action according to your investment advisor given the much higher than normal odds of a crash. That may not mean shorting. It may mean increasing cash positions or hitting the sidelines for a while – or it may mean a carefully constructed shorting strategy developed with your advisor that limits losses, and invests only the amount which you can afford to lose.

We do not think it is wise to listen to folks who minimize the risk in markets pointed out by the Hindenburg Omen.

We disagree with the argument that, since so many of the listings on the NYSE, especially those of the New High “stock” group recorded for the Omen, are some type of fixed income product (ETFs, preferred stocks, etc) that the Omen isn’t really capturing “stocks” when it says “we got x % New Stock Highs,” therefore the Omen is irrelevant.

Our position is that the argument that the “stock market Omen” isn’t measuring the internals of the “stock” market is false. Here is why:

A huge percent of NYSE stocks are financials (banking firms and firms such as General Electric which is essentially a financial firm, although many people would not think of them that way) and financial firms hold substantial positions in bonds. Almost every bank listed on the NYSE carries a fixed income bond portfolio somewhere between 15 and 30 percent of their entire balance sheet, and have for years, going back far beyond the past 30 years of our research, a period of time when the Hindenburg Omen worked just fine, thank you very much. Bond and other fixed income products are prevalent throughout the distribution of companies listed NYSE, and have been for years.

The Hindenburg Omen has worked for at least the past 30 years. It accurately called the stock market crashes of 2007 and 2008 when the NYSE included many stocks holding significant positions in fixed income instruments. It does not matter. Our entire economy has essentially moved from a manufacturing base to a financial base. This makes the Hindenburg Omen relevant.

We believe it would be unwise to ignore this potential stock market crash warning.

Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

No stock market crash (a decline greater than 15%) has occurred over the past 30 years without the presence of a Hindenburg Omen except on one occasion (the mini-crash of July/August 2011). As such, without an official confirmed Hindenburg Omen, we are pretty safe from experiencing a major stock market correction. On the other hand, if we have an official Hindenburg Omen, then a critical set of market conditions necessary for a stock market crash exists. As of September 19th, 2014, we have such a condition in the market… Read More »

There are two market warning signs which have just recently been triggered and which have gotten a lot of press attention due to their catchy names – the Titanic Syndrome and the Hindenburg Omen – both of which are giving a “preliminary sell signal” based on analyses of 52-week New Lows (NL) in relation to New Highs (NH) on the NYSE within a specific period of time. Read More »

The probability of a move greater than 5% to the downside after a confirmed Hindenburg Omen was 77% [conversely, 23% of the time no significant market downturn occurred] and usually took place within the next forty-days. The probability of a panic sellout was 41% and the probability of a major stock market crash was 24%. The Omen was activated on the New York Stock Exchange on August 11 so the probability is that we will see a steep market decline sometime in September. Words: 871 Read More »

Even though the fact that we are in the midst of an absolutely insane financial bubble should be glaringly obvious to anyone with half a brain, the above referred to skeptics have convinced themselves that the current state of affairs can persist indefinitely. Sadly, it looks like what is about to hit us in 2015 is going to serve as a very rude wake up call for them and for the millions of other Americans that currently have their heads in the sand. Read More »

It’s hard to see the current spike in equities as anything other than a blow-off move into a final top. It’s the only description for what the equity markets are doing. Let me explain further. Read More »

Huge growth patterns in markets — more commonly known as “bubbles” — have a remarkable timing signature common to every single one of them – they all have lasted 64 or 65 months from initial growth to blow-off top. Read More »

Mark this day on your calendars. The Dow is at 16974, the S&P 500 is at 1982 and the NASDAQ is at 4549. From this day forward, we will be looking to see how the stock market performs without the monetary heroin that the Federal Reserve has been providing to it. Read More »

I have seen the light. I have seen the error of my ways. At long last, I understand. This stock market is a great investment. Stocks are just going to keep going up and up and up and up. Anyone who doesn’t buy now is a fool. I have learned to love the bull market. Yeah, sure! Read More »

If you’re in the business of fear-mongering, one of the go-to moves to try to scare investors is to predict that the markets are looking eerily similar to October of 1987. That being said, you could actually argue that the 1987 crash was a good thing for the markets. It knocked some of the wind out of its sails after more than doubling from 1982-1986 so it begs the question “Would a Repeat of the 1987 Crash Really Be That Bad?”. Read More »

The Russell 3000, a broad equity index representing 98% of the investable U.S. stock market, is up 9.3% for 2014 on a total-return basis…[but] the median total return for Russell 3000 constituents is just 1.5% reflecting the fact that small- and mid-cap stocks are under-performing… This current alarming deterioration in breadth, a term that refers to how much of the market is participating in the advance, begs the question: “Is the stock market sitting on a trap door?” This article looks at 2 trap door indicators that suggest that that might, indeed, be the case. Read More »

Is a major top at hand? It is often said that bells do not ring to signal the end of a bull market but if the broad averages were in fact to plummet in the weeks ahead, never forget that bells did indeed ring. This article contains the opinions of three heavyweights in the guru world which are so insightful that any investors who ignore their observations do so at their great peril. Read More »

The 10-year yield’s Death Cross has proven to be a pretty significant risk-off shot across the bow over the last decade and this matters today because the 10-year yield put in a Death Cross back in early April of this year. So what does the 10-Year’s Death Cross mean for stocks this time? Read More »

The financial markets are drastically over-capitalizing earnings and over-valuing all asset classes so, as the Fed and its central bank confederates around the world increasingly run out of excuses for extending the radical monetary experiments of the present era, even the gamblers will come to recognize who is really the Wile E Coyote in the piece. Then they will panic. Read More »

Market Cap to GDP is a long-term valuation indicator that has become popular in recent years, thanks to Warren Buffett and it is now at the second highest level in the past 60 years – even surpassing the levels reached in 2007. Read More »

To ignore all the compelling charts and data below would be irresponsible and, as such, will NOT go unnoticed by institutional investors. Such bearish barometers for stocks worldwide will, unfortunately, be ignored by the ignorant and gullible hoi pollo causing them severe financial loss as investor complacency in the past has nearly always led to a stock market crash. Read More »

In their infinite wisdom the Fed thinks they have rescued the economy by inflating asset prices and creating a so called “wealth affect”. In reality they have created the conditions for the next Great Depression and now it’s just a matter of time…[until] the forces of regression collapse this parabolic structure. When they do it will drag the global economy into the next depression. Let me explain further. Read More »

Once again the stock market is in full bubble mode. The market was already overvalued earlier this year and the froth continues to build. Valuations are off the chart and euphoria is setting in while, at the same time, you have inflation eroding the purchasing power of regular Americans not participating in this casino. All the signs of a bubble top are there – massive speculation, unexplainable valuations, and blind optimism – even though the fundamentals don’t make any sense. This article substantiates that contention. Read More »

Large numbers of people believe that an economic crash is coming next year based on a 7-year cycle of economic crashes that goes all the way back to the Great Depression. Such a premise is very controversial – some of you will love it, and some of you will think that it is utter rubbish – so I just present the bare bone facts below for you decide for yourself if it is something to seriously consider protecting yourself from in 2015. Read More »

Our financial system is in far worse shape than it was just prior to the financial crash of 2008. The truth is that we are right on schedule for the next great financial crash. You can choose to ignore the warnings if you would like but, ultimately, time will reveal who was right and who was wrong and, unfortunately, I think I will be proven to have been right. Read More »

It is frighteningly clear to any objective analyst and/or intelligent investor that the present bull market rally in stocks (2006-2014) is “beyond the pale” (outside the bounds of acceptable behavior) i.e. the excess valuation is dangerously above the market excesses of the 1920s. Read More »

When taking a step back and viewing longer-term gauges, we see warning signs flashing. Many of these readings are in extreme territories, and historically bear markets have occurred from such overbought positioning. We are all cued up for a bear! Read More »

The stock market is presently a roulette wheel with dimes on black and dynamite on red. We continue to have extreme concerns about the extent of potential market losses over the completion of the present market cycle. Read More »

Amazingly, we are on the verge of a global deflationary downturn and what could be a historic bear market, yet Wall Street prognosticators remain focused on the inflationary risks of excessive monetary stimulus. Their focus could not be more wrong. Let me explain further. Read More »

With valuations stretched, investors seem to be justifying their stock purchases here with the argument that we have yet to reach the mania of 1999-2000 but history has shown us that there doesn’t have to be a bubble for there to be a sharp decline in stocks. As we saw in 2007, it doesn’t mean there is no risk of a significant market decline or that valuations are compelling and that investors should be expecting above average long-term returns from here. They should not. Read More »

DISCLOSURE: It is our intent that all posts on this site be in accordance with the requirements, restrictions and terms of the Copyright Law of the United States and all other copyright treaties to which the United States is party and more specifically of the Digital Millennium Copyright Act - Blogger . As such, all posts on this website have been screened at Library of Congress Catalog as to their eligibility for posting. Should any post be deemed to be inadvertently in contravention of these Acts' terms please advise with substantiation of such apparent contravention (i.e. registration number) and the article in question will be immediately deleted from the site. Also, visit U.S. Code 17-107 Limitations on Exclusive Rights - Fair Use

FAIR USE NOTICE: This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of financial, economic and investment issues, etc. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.

COPYRIGHT & DISCLAIMER: Lorimer Wilson is not a registered advisor and does not give investment advice per se. The articles to be found on the site are expressions of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity or any other financial instrument at any time. Please consult with a qualified investment advisor who is licensed by appropriate regulatory agencies in your legal jurisdiction before making any investment decisions, and barring that, we encourage you confirm the facts on your own before making important investment commitments. The information on this site was obtained from sources which we believe to be reliable, but we do not guarantee its accuracy. None of the information, advertisements, website links, or any opinions expressed constitutes a solicitation of the purchase or sale of any securities or commodities. Please note that while Wilson may already have invested or may from time to time invest in securities that are recommended or otherwise covered on this website they do not intend to disclose the extent of any current holdings or future transactions with respect to any particular security and, as such, you should consider this before investing in any security based upon statements and information contained in any report, post, comment or recommendation you read on the site.